UnitedHealth Delays Force Pentagon to Take Action Again

The Pentagon will step in for the third time to combat medical-care delays under UnitedHealth Group Inc.’s $20.5 billion contract, as an analyst warned they risked hurting the company’s earnings.

The bottlenecks began after the nation’s biggest health insurer took over the contract for coordinating medical services in April. The delays forced the Defense Department to temporarily ease insurance requirements twice in May, with the military today announcing another extension until July 2.

The delays may have “negative implications” for UnitedHealth’s earnings in the second quarter, Sheryl Skolnick, a Stamford, Connecticut-based analyst with CRT Capital Group LLC, said in a report today.

“The bad news is that the problem isn’t solved yet,” Skolnick said. “The pipe is still clogged.”

While the Minnetonka, Minnesota-based insurer has improved its performance, “there is a need for additional progress in the area of specialty-care referrals,” Austin Camacho, a spokesman for the military’s Tricare health program, said in an e-mail.

The backlog affected members of the Tricare Prime plan for active-duty troops, retirees and their families in 21 states, most in the western region of the U.S. Many of the complaints have been centered on UnitedHealth’s slow authorizations of specialty-care referrals.

Bruce Jasurda, a UnitedHealth spokesman, didn’t respond to an e-mail and phone call seeking comment.

Contract Penalties

The Pentagon’s action today will allow the plan’s members to temporarily sidestep UnitedHealth’s approval process for specialty-care referrals without incurring any fees. The Defense Department first waived the requirement through May 18 and then extended it through June 18.

The good news is that the Pentagon’s extension is for two weeks -- not months, wrote Skolnick, who is maintaining a “buy” rating on the company. She said she didn’t believe the contract was at risk, as embarrassing as it must be for UnitedHealth.

“However, we can’t rule out monetary penalties, etc., that the Pentagon may be able to impose under the contract,” Skolnick said.

The loss ratio, or percentage of premiums paid out for medical claims, on the Tricare contract, “could be significantly higher than anticipated,” she said. “We see it as a drag on a contract that probably wasn’t going to be profitable this quarter anyway.”

Less Control

Because the Pentagon waivers allow enrollees to obtain medical care without UnitedHealth’s authorization, the insurer has less control over health-care costs under the plan, Skolnick said.

In an interview last week, she said the failures may also hurt the company’s ability to win more federal contracts.

UnitedHealth last week changed the leadership of the unit overseeing the Pentagon contract. Lori McDougal, former chief executive officer for the division, accepted a new position with the company.

Tina Jonas, a former Defense Department comptroller, is now president of UnitedHealth’s military and veterans unit, which oversees the Pentagon contract. No one has been named CEO of that unit, Matt Stearns, a UnitedHealth spokesman, said last week.

“The change in leadership feels to me like a mea culpa,” Ana Gupte, an analyst with Dowling & Partners in Farmington, Connecticut, said in a phone interview. “If they have this go on for another several months, it’s an issue. Given that they just announced a change in leadership, it probably is worth giving them some time to fix it.”

Reputation Damage

The delays under the contract have “certainly” damaged UnitedHealth’s reputation, Gupte said. For now, it’s unlikely the Pentagon contract delays will affect the company’s share price, she said.

UnitedHealth cracked the U.S. military market with the contract, awarded in March 2012. The Pentagon spent almost $61 billion on health care during the year that ended Sept. 30, 2012, said Wayne Plucker, a global industry manager at Frost & Sullivan, a consulting and market research firm based in Mountain View, California.

The contract covers 21 states in Tricare’s western region, including Colorado, California, Hawaii, Minnesota and Arizona. There are 1.6 million Tricare Prime beneficiaries in the region served by UnitedHealth.

The military chose UnitedHealth over TriWest Healthcare Alliance Corp., a Phoenix-based company that coordinated care for military families for 17 years, for its better “technical approach,” according to a federal government review published last year.

TriWest has cut 1,500 employees since losing the contract, said Scott Celley, a spokesman for the company. David McIntyre Jr., TriWest’s founder, has said the contract was the company’s “only business.”

Before it's here, it's on the Bloomberg Terminal.